Debit Interchange Network Choices

Now that regulations implementing the Durbin amendment are finalized–at least for the short term–credit unions have to decide how many debit networks they want and if they have to join any.

Under the amendment’s network exclusivity provisions, CUs must have at least two nonaffiliated debit networks. They can both be networks that process debit transactions that are authenticated with signatures or PINs or they can be one of each.

The network exclusivity provisions also allow merchants to route debit transactions along networks that cost them the least.

This leaves credit union debit issuers with a dilemma, according to Stuart Bloom, president of Bloom/Cogar consulting, an EFT consultant who works with payments CUSOs, including Credit Union 24.

“The law said that credit unions are entitled to debit interchange, and that most of them are exempt from the cap,” he told a webinar sponsored by Credit Union 24. “But the law also said they have to carry at least two debit networks and that merchants will be able to route their transactions.”

Others predict this routing will eventually undermine the exemption.

Thomas Riha, CEO of PayFusuion, a debit consultancy, explained that some of the new market dynamics in a white paper his firm issued.

“PIN networks, which historically have worked hard to satisfy debit card issuers with competitive interchange rates, must now work to satisfy merchants,” Riha wrote. “It is quite ossible that those networks may actually lower their interchange rates."

“I don't know of any payment networks that will guarantee to support a dual interchange scheduled far into the future,” Tony Emrick, a senior vice president with the Vantiv card processor told participants in a NAFCU-sponsored webinar last week.

Emrick referred to the dual interchange schedules that processors have said they will offer to implement the Durbin amendment’s exception to the interchange cap. Emrick and other said the duel schedules will come under increasing pressure as more merchants gain the technology and ability to route more transactions.

One thing that Emrick, Bloom and other executives suggested credit unions could do to help protect their interchange income would be to limit the number of debit networks to which they belonged to no more than the two required for compliance. This will make it more difficult for merchants seeking to route transactions by the least expensive route.

For some credit unions, the new rules will mean little change. They already have two and only two unaffiliated payment networks and will not have to change anything to remain compliant. But others may have to participate in a new debit processing network and some may find it prudent to reduce the numbers of their debit card networks down from three or four to only two again.

“For some credit unions, these things have accumulated over the years,” explained Jim Hanisch, senior vice president of CO-OP Financial Services, a payments CUSO that is not competing to be included as a PIN network for Durbin compliance. Hanisch explained that CO-OP had decided some years before that it would not try to compete for debit processing at the point of sale because of the steep discounts on interchange that Hanisch said merchants would demand.

Credit unions looking for a credit union-owned PIN debit processing network that qualifies under the new regulations can consider Credit Union 24. It is mounting a marketing campaign to both remind credit unions that there is a credit union-owned alternative and to encourage credit unions that choose Credit Union 24 to choose its DebitEdge option, which will mean withdrawing from other PIN debit networks.